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Welfare to Work in the United Kingdom

Authors

Wolfgang Ochel

Disciplines

Economics

Education

Abstract

WELFARE TO WORK IN THE UNITED KINGDOM WOLFGANG OCHEL* In most OECD countries unemployment of low skilled workers is high. This is due to the form of technical progress, competition by low-wage coun- tries and the traditional social security system. The traditional social security system follows a wage replacement policy. It pushes the reservation wage up and thus destroys part of the employment opportunities that otherwise would have been available. The alternative to the policy of wage replacement is a policy of wage supplement. Benefits are not given on condition of staying away from formal employment but on condition of par- ticipating in it but still not earning enough. A num- ber of mainly Anglo-Saxon countries have moved from a wage replacing to a work complementing welfare system. One of those countries is the United Kingdom. Its welfare-to-work programme consists essentially of a “working families’ tax credit” (now: “working tax credit”). Unemployment of low skilled workers and replacement policy Most OECD countries have high rates of unem- ployment for the less skilled, as a rule considerably exceeding the general unemployment rates. Table 1 shows the unemployment rate for employable persons between ages 25 and 64 with a qualifica- tion below upper secondary education. It shows that in 2001, the general unemployment rates exceeded 10 percent only in Greece (women), Italy (women) and Spain (women). For the less skilled such rates prevail in Belgium (women), Finland, France (women), Germany, Greece (women), Italy (women), Spain (women) and Canada. The unweighted average unemployment rate of workers with a “below upper-secondary education” is roughly 50 percent higher than the general unemployment rate of the countries exam- ined in Table 1. The high unemployment rates of low-skilled work- ers are due to technical progress, competition by low-wage countries and the traditional social secu- rity system. This system grants benefits on the con- dition of not working. These benefits

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